The Interaction Between Fiscal Decentralization and Institutional Quality Could Serve as an Alternative to Reducing Public Debt in Central Africa

Abstract

The Central Africa region is encountering significant economic challenges, particularly regarding public debt management. High public debt in Central Africa may hinder governments' ability to invest in development projects and deliver essential services to the population. Therefore, it is important to explore how the interplay between fiscal decentralization and institutional quality can provide an effective solution for reducing public debt. Futhermore, Central African countries face significant difficulties in managing public debt, often exacerbated by corruption. This study examines whether the quality of institutions is the channel through which fiscal decentralization leads to the reduction of public debt in Central Africa. This study analyzes the impact of fiscal decentralization on public debt in Central Africa, with emphasis on the role of corruption. Using various econometric methods, including fixed effects, Driscoll and Kraay, the analysis reveals that fiscal decentralization helps reduce public debt in Central Africa. However, the positive impact of fiscal decentralization on public debt depends on a lower level of corruption. These results are robust as the use of GMM in system and the 2SLS approach of Lewbel have led to the same conclusions. These conclusions highlight the importance of the quality of institutions in the process of improving budgetary discipline, with a view to strengthening the beneficial effects of fiscal decentralization on public debt. This study suggests that anti-corruption institutions in Central Africa constitute the keystone for promoting fiscal decentralization and reducing public debt effectively.